Your credit rating affects your ability to procure financing and obtain favorable rates. FICO, also referred to as Fair Isaac Corporation, is the most widely used credit scoring system in the world. FICO guidelines state the following go into your credit score:
- Payment History - 35% of score - includes past due, late payment data, derogatories, such as "paid as agreed", bankruptcy, judgments, etc.
- Amounts Owed - 30% of score - including percentage of balances to credit limits
- Length of Credit History - 15% of score
- New Credit - 10% of score - includes credit inquiries, length of time to establish new credit following past payment problems, number of new accounts, etc
- Types of Credit Used - 10% of score - includes percentages you have of mortages, credit cards, installment loans etc
You can see that the biggest category on your credit is payment history. So outside of the short sale or foreclosure event, late payments, delinquencies and credit limits/balances all add up to affect your score. Each person's situation will be different, so there is no exact number that can be quoted about how much your score will change if you do a short sale or have a foreclosure.
A short sale or foreclosure are both similar derogatory events on your credit score, typically Score Factor 22. However, a short sale will have a lesser impact on your future ability to borrow than a foreclosure or deed-in-lieu of foreclosure.
Fannie Mae, the nation's largest backer of mortgages, has announced recent favorable changes regarding its view of Short Sales and how they affect the credit-worthiness of borrowers. In fact, you may be able to purchase a new home in as little as 2 years after a Short Sale, or even sooner depending on your payment history and your arrangement with your Short Sale lender. The Fannie Mae policy clearly indicates that Short Sales are preferable to deed-in-lieu of foreclosures and straight foreclosures. Following are excerpts from the new policy guide and memo, where you will see future borrowing restrictions outlined :
Establishing a new policy for preforeclosure (Short) sales . A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.
If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.
Deed-in-Lieu of Foreclosure: 4 year time period from date deed-in-lieu executed to obtain new mortgage, with restrictions that apply for 4 to 7 years : Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time. 10% down also required.
Foreclosure: 5 year restriction before a new mortgage may be obtained. Restrictions apply as follows for 5-7 years after foreclosure: Minimum credit score 680, at least 10% down, only allowed to purchase primary residence, no investment or second home property.
For more perspectives on how foreclosure affect your credit Score Contact: rfrattalone@gmail.com
Fannie Mae, the major federally chartered mortgage backer, will not allow borrowers with a foreclosure to get another Fannie Mae-backed mortgage for 5-7 years, and only with a minimum credit score of 680.
- Freddie Mac, federally chartered to support the secondary mortgage market, sees foreclosure as a major negative on credit for seven years.
- Freddie Mac and Fannie Mae loan applications include questioning the borrower on whether they have ever had a foreclosure or deed-in-lieu of foreclosure. If so, the loan is more critically analyzed, and may not be so easy to obtain.
In summary, a Short Sale is the best choice when it comes to ability to secure future financing.
...No Matter What You Owe !
